Does a lender's forgiveness of the seller's remaining mortgage debt increase Florida documentary stamp tax on a short-sale deed?

Plain-English summary

A Florida real estate short sale involved an unrelated seller, lender, and buyer acting at arm's length. The buyer paid $335,000. The seller's mortgage debt was larger, but the lender agreed to release its lien for the sale proceeds and cancel part of the remaining debt. The property transferred to the buyer free of mortgage liens and debt-related encumbrances.

Florida held that documentary stamp tax was based only on the amount paid by or for the buyer—$335,000—not the buyer's price plus the lender's forgiven debt. Although debt cancellation was valuable to the seller, it arose from a separate transaction between the seller and lender. The buyer did not discharge or assume the seller's obligation, did not control the lender, and gave no value beyond the purchase price.

Because section 201.02 did not clearly impose tax on that separate cancellation, the Department construed the taxing statute narrowly and excluded the forgiven debt. It also said a refund was due for documentary stamp tax previously paid on the cancellation amount.

The advisement did not decide how sections 201.08 and 201.09 would apply if the lender required the seller to sign a new promissory note or other security for the unpaid balance.

What this means for you

The buyer's consideration controls this short-sale result

The ruling applies when the buyer pays the agreed purchase price, takes the property free of liens, and does not assume or satisfy the seller's mortgage debt. The lender's loss decision remains separate from the deed transaction.

Forgiveness must be a genuine lender-seller transaction

The parties here were unrelated, no principal-agent or fiduciary relationship existed, and the lender independently evaluated its credit risk and collateral. Related-party arrangements or buyer involvement could change the analysis.

An overpayment may support a refund

The taxpayer had paid deed tax using $610,000, which combined the $335,000 price with forgiven debt. The Department concluded that a refund was due for the tax attributable to the cancellation amount.

Documentary stamp value and property-tax value are separate issues

The Department declined to instruct the Miami-Dade County Property Appraiser how to change the property's ad valorem value. Valuation questions belonged with the local property appraiser, although the Department's Property Tax Oversight program had informed appraisers about this deed-tax position.

Common questions

Q: Was the forgiven mortgage balance part of deed-tax consideration?
A: No, because the lender's cancellation was separate from the buyer-seller transfer and the buyer neither assumed nor discharged the debt.

Q: What amount was taxable in the example?
A: The $335,000 paid by or on behalf of the buyer.

Q: Could the taxpayer recover tax paid on the forgiven debt?
A: Yes. The ruling says a refund was due for the portion of documentary stamp tax paid on the cancelled indebtedness.

Q: Did the ruling cover a replacement note signed by the seller?
A: No. It expressly did not address sections 201.08 and 201.09 when the seller executes a promissory note or other security with the lender.

Citations and references

• Fla. Stat. § 201.02(1) (documentary stamp tax on real-property transfers and consideration)
• Fla. Stat. §§ 201.08 and 201.09 (promissory notes and other written obligations—not decided here)
• Fla. Stat. § 213.22 (Technical Assistance Advisements)
• State ex rel. Seaboard Air Line Railway Co. v. Gay, 160 Fla. 445 (1948) (ambiguous taxing provisions construed narrowly)

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 09B4-001

Original ruling text

SUMMARY
QUESTION: In the case where a “short sale” of real property occurs, where the real property is
sold to a buyer for a price that is less than the seller’s debt secured by the property and a portion
of the seller’s indebtedness is forgiven by the lender, what is the proper amount to base the
documentary stamp tax on?
ANSWER: The consideration which the documentary stamp tax should be based on in a
transaction involving a short sale of property is the amount agreed to be paid by the buyer to the
seller. In connection with the short sale, the seller is required to transfer the property free of any
mortgage liens or debt-related encumbrances, with the seller’s lender agreeing to release the lien
on the seller’s property for less than the full amount of the seller’s debt. The cancellation of all or
a portion of the remaining amount of debt after receipt of the proceeds remaining from the
purchase price is not part of the taxable consideration in a short sale transaction since the seller’s
debt to the lender was incurred in a prior, unrelated transaction.
January 13, 2009
Re:

Technical Assistance Advisement No. 09B4-001
Documentary Stamp Tax – “Short Sales” of Florida Real Property
Section 201.02(1), F.S.
XXX (“Taxpayer”)

Dear :
This Technical Assistance Advisement responds to your request dated August 29, 2008. Your
request satisfies the requirements of Rule 12-11.003, Florida Administrative Code, and the
Department issues this advisement pursuant to Section 213.22, Florida Statutes.
FACTS
You have requested technical assistance on behalf of the Taxpayer. You request guidance in
determining the correct documentary stamp tax on deeds for “short sales” of real property in
Florida.
A “short sale” refers to the sale of real property for a price that is less than the owner’s
outstanding debt secured by the property. In a typical short sale, the seller is in financial distress
and is currently defaulting on the debt secured by the seller’s property or will likely default in the
near future. Additionally, the property securing the seller’s debt has declined in value due to
market conditions, and the seller wants to sell the property to satisfy as much of the debt as
possible.
The short sale involves three parties: (1) a real property owner (seller), (2) a lender that holds a
lien against the seller’s real property, and (3) a purchaser. None of the parties are related, nor
does any party have a principal/agent or fiduciary relationship with any other party. All parties
are acting in good faith and at arm’s length. The seller’s debt to the lender was incurred in an
unrelated, prior transaction, and no other obligations or relationships between any of the parties
are involved, except as described in this advisement.

Technical Assistance Advisement
Page 2 of 5
As part of the sale to the purchaser, the seller is required to transfer the real property free of any
mortgage liens or other debt-related encumbrances. The seller will contact its lender to
determine if the lender will release its lien on the property for less than the full amount of the
seller’s debt.
Lenders have standard processes for agreeing to satisfy liens for less than a full pay-off.
Generally, the seller completes an application once an offer is received,1 and the lender evaluates
the situation to determine whether it will agree to satisfy its lien for what the lender will receive
under the sale. We understand that lenders generally have the property appraised to determine
the fair market value of the real property, and lenders typically review the transaction to ensure
that the seller and purchaser are negotiating at arm’s length. After consideration of the seller’s
application and the risks involved, the lender will notify the seller whether it will agree to satisfy
its lien under the circumstances.
Lenders that agree to satisfy their liens typically do so in three different ways. First, the lender
may agree to satisfy its lien, but makes no representation concerning whether it will cancel the
seller’s remaining debt. Second, the lender may agree to satisfy its lien, but requires the seller to
execute a separate promissory note for the remainder of the debt, explicitly establishing that it
will not cancel the remaining debt. Third, the lender agrees to satisfy its lien, and agrees to
cancel all or a portion of the remaining amount of debt after receipt of the proceeds remaining
from the purchase price. The lender and the seller alone negotiate the satisfaction of the lien and
the potential cancellation of debt; the purchaser has no influence or control over the relationship
between the seller and the lender.
Once the lender has agreed to satisfy its lien on the property, the lender will provide a pay-off
statement to the closing agent, notifying the agent of the amount of the proceeds from the sale to
pay the lender at closing. The lender also files a satisfaction of lien and other applicable
paperwork even though it is receiving an amount less than the outstanding debt on the property.
Although the lender’s pay-off statement will identify the amount expected at closing, the pay-off
statement does not include any information concerning the disposition of any remaining debt
between the lender and the seller.
Typical procedures for the sale of real property are followed at the time the seller and purchaser
close their transaction. The purchaser will provide the purchase price, and the seller will deed
the property to the purchaser free of any mortgage or debt-related encumbrance.
REQUEST FOR ADVISEMENT
You request guidance on determining the consideration for the transaction for purposes of
Section 201.02(1), F.S., when the lender cancels a portion of the seller’s debt in a short sale.
Secondly, since the documentary stamp tax paid on the deed was based on the total sales price
paid by the Taxpayer plus the forgiven mortgage debt by the seller’s lender, a ruling is requested
on what type of notice should be given to the Miami-Dade County Property Appraiser to advise
1

While rare, it appears that some sellers will contact their lenders prior to listing the property for sale. In this
circumstance, the lender may notify the seller that it will only release its lien on the seller’s property for a certain
amount, or it may wait until an offer is received before making the determination.

Technical Assistance Advisement
Page 3 of 5
him that the fair market value of the condominium was only $335,000 for ad valorem tax
purposes rather than the $610,000 as reflected by the documentary stamp taxes paid on the deed.
DISCUSSION
Florida imposes documentary stamp tax on documents that transfer an interest in Florida real
property. The tax is calculated based on the “consideration” for the transfer. Consideration
includes, but is not limited to, money paid or to be paid, the discharge of an obligation, and the
amount of any mortgage or other encumbrance. See Section 201.02(1), Florida Statutes.
When the seller executes the document that transfers the real property to the purchaser, that
document transfers an interest in real property and, thus, is taxable.
In determining consideration for the transfer, we note that the only thing of value given by the
purchaser is the purchase money. Under the facts you provided, the purchaser is not giving any
other property; the purchaser does not discharge any of the seller’s obligations; the property is
not subject to any liens, mortgages, or other encumbrances when it is transferred; and the
purchaser is not directing any other party to give anything of value. The only other thing of
value received by the seller is the lender’s cancellation of debt.
In many common real estate transactions that are not short sales, the lender receives full payment
of the loan obligation that the seller has incurred in an unrelated prior transaction. Once the
lender has determined that this obligation is satisfied or will be satisfied, the lender agrees to
satisfy its lien on the property. In a short sale, however, there is a partial satisfaction rather than
full satisfaction of the loan obligation. The lender has determined that in the given
circumstances it is willing to take present value dollars in satisfaction of the loan obligation,
essentially discounting the amount of the loan by the full or partial cancellation of the amount of
loan debt that is not satisfied in the short sale transaction. This cancellation of debt is valuable to
the seller; thus, the question arises whether the amount of cancelled debt should be considered as
consideration for the transfer. For the reasons discussed below, we conclude that it is not
consideration for the transfer.
The lender’s agreement to satisfy its lien and cancel a portion of the seller’s debt is a separate,
unrelated transaction between the seller and the lender. The seller and purchaser alone have
entered into their contract for the transfer of real property. The lender is not related to either one
of those parties and is not bound by any aspect of the contract between the seller and purchaser.
Independently, the lender has agreed to satisfy its lien and cancel a portion of the seller’s debt.
The lender is not related to or controlled in any way by either party, and neither the lender nor
any of its related parties is receiving any interest in the real property. The lender has merely
evaluated its risk as a creditor of the seller and the decreasing value of seller’s collateral, and the
lender has made a business decision to cancel a portion of the seller’s debt in return for the
current payment of a lesser amount. Section 201.02(1), Florida Statutes, does not clearly impose
tax merely because the seller happens to be a party to both transactions.
Unlike other situations where an obligation is discharged in exchange for real property, in the
situation described above, it is, at best, unclear whether the Legislature intended to impose tax on

Technical Assistance Advisement
Page 4 of 5
the amount cancelled by the lender. When the application of a taxing provision is unclear or
ambiguous, the Department is bound to construe that taxing statute narrowly, against the
imposition of tax. See, e.g., State ex. rel. Seaboard A.L.R. Co. v. Gay, 160 Fla. 445 (Fla. 1948).
Thus, we construe the statute to not include the lender’s cancellation of debt as consideration in
the instant case. However, the Legislature may choose to clarify the application of the statute
through legislation.
You also asked for a:
Ruling on what type of notice should be given to the Miami-Dade County Property
Appraiser to advise him that the fair market value of the condominium was only
$335,000 for ad valorem tax purposes rather than the $610,000 as reflected by the
documentary stamp taxes paid on the deed.
Please note that the Department of Revenue has oversight responsibilities for ad valorem taxes
imposed by local taxing authorities, including counties, cities, school districts and other local
taxing authorities. Our Property Tax Oversight program serves that function and is a separate
program from the one issuing this advisement. Responsibility for property valuation lies with
the various local taxing authorities and questions regarding the valuation of property ought to be
directed to the office in the county where the property is located. Having said that, we note that
our Property Tax Oversight program is aware of the position taken by the Department in this
advisement with respect to documentary stamp taxes imposed under Chapter 201, F.S., and has
provided property appraisers in the state with general information related to this documentary
stamp tax position.
POSITION OF THE DEPARTMENT
The amount paid or given by the purchaser of $335,000, or paid or given by another on behalf of
the purchaser, for an interest in Florida real property is consideration and subject to tax.
However, in the transactions described above, when the lender cancels indebtedness of the seller,
that cancellation is not included in determining the amount of consideration subject to tax under
Section 201.02, Florida Statutes. A refund is due based on the portion of documentary stamp tax
paid on the amount of indebtedness cancelled by the seller. This advisement does not address the
application of Sections 201.08 and 201.09, Florida Statutes, when a promissory note or other
security is executed between the lender and the seller.
This Technical Assistance Advisement is binding on the Department only under the facts and
circumstances described in the request for this advice and only for the taxpayer involved in this
advisement. Additionally, subsequent changes to the applicable law may subject similar future
transactions to a different treatment than expressed in this response; the Legislature may clarify
how documentary stamp tax is to be applied in this situation.
You are further advised that this response, your request and related backup documents are public
records under Chapter 119, F.S., and are subject to disclosure to the public under the conditions
of s. 213.22, F.S. Confidential information must be deleted before public disclosure. In an effort
to protect confidentiality, we request you provide the undersigned with an edited copy of your

Technical Assistance Advisement
Page 5 of 5
request for Technical Assistance Advisement, the backup material and this response, deleting
names, addresses and any other details which might lead to identification of the taxpayer. Your
response should be received by the Department within 15 days of the date of this letter.
Sincerely,

Joy B. Eldred, C.P.A.
Tax Law Specialist
Technical Assistance & Dispute Resolution
JBE/
Record ID: 50570